Unit 3 - Feb 27 (Fiscal Policy)

Fiscal Policy - changes in the expenditure or tax revenue of the federal government.

• 2 Tools
• Taxes - government can increase/decrease taxes.
• Spending - government can increase/decrease spending.
• Fiscal Policy is enacted to promote our nation's economic goals: 
• Full employment
• Price stability
• Economic growth

Deficit, Surpluses, and Debt

• Balance budget
• Revenue = expenditure
• Budget deficit
• Revenue < expenditure
• Budget surplus
• Revenue > expenditure
• Budget debt
• Deficit - surplus
• Government must borrow money, when it runs a budget deficit.
• Government can borrow from 
1. Individuals (taxing)
2. Corporation
3. Financial institutions
4. Foreign entities / foreign government

Fiscal Policy has 2 options

• Discretionary Fiscal Policy (action)
• Expansionary Fiscal Policy - think deficit.
• Contractionary Fiscal Policy - think surplus.
• Non-discretionary Fiscal Policy - no action.

Discretionary vs. Automatic Fiscal Policy

• Discretionary - increasing/decreasing government spending and or taxes in order to full employment.
• Automatic - unemployment compensation and margin tax rates are examples of automatic policies that help mitigate the effects of recession and inflation.

Contractionary vs. Expansionary 

• Contractionary - policy designed to decrease AD.
• Strategy used to control inflation
• Expansionary - policy designed to increase AD.

Recession is countered with expansionary policy.

• Increase government spending.
• Decrease taxes.

Contractionary - inflation countered.

• Increase government spending.
• Decrease taxes.
• Unemployment increases.

Automatic/Built-in Stabilized - anything that increase the government budget deficit during a recession and increase it's budget surplus during inflation without regulating explicit action by policy makers (Transfer payment).

Progressive tax system - average tax rate (tax revenue / GDP), rises with GDP.

Proportional tax system - average tax rate remains constant as GDP changes.

Regressive tax system - average tax rate that falls with GDP.